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 Journal of Financial Management of Property and Construction
Financial performance and operating strategies of Malaysian property
development companies during the global financial crisis
Toong Khuan Chan, Abdul-Rashid Abdul-Aziz,
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JFMPC
22,2
174
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Received 19 February 2016
Revised 29 April 2016
29 September 2016
Accepted 9 October 2016
Journal of Financial Management
of Property and Construction
Vol. 22 No. 2, 2017
pp. 174-191
© Emerald Publishing Limited
1366-4387
DOI 10.1108/JFMPC-02-2016-0009
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1366-4387.htm
Financial performance and
operating strategies of Malaysian
property development companies
during the global financial crisis
Toong Khuan Chan
Faculty of Architecture Building and Planning, The University of Melbourne,
Melbourne, Australia, and
Abdul-Rashid Abdul-Aziz
School of Housing, Building and Planning, Universiti Sains Malaysia,
Georgetown, Malaysia
Abstract
Purpose – The purpose of this paper is to characterise the financial performance and to identify the
operating strategies of property development companies in Malaysia during the 2008 global financial crisis
(GFC).
Design/methodology/approach – The research approach includes a comprehensive analysis of the
financial statements and annual reports of 35 property development companies listed on the Kuala Lumpur
stock exchange. The financial statements were analysed to evaluate the financial performance of these
companies and to assess the severity of the impact of the GFC on revenues and profits. The operating
strategies were determined from a content analysis of the statement to shareholders.
Findings – An aggregated analysis of the financial performance indicates a 23 per cent decline in net profit
in 2008. Classifying these companies into two separate sets of distressed and non-distressed companies
showed that poor financial performance and a high debt-to-equity ratio pre-GFC led to continuing poor
performance during the GFC period and beyond. Survival strategies adopted by distressed companies include
the disposal of assets to improve cash flow, refinancing loans, delaying the launch of new projects and
reducing their workforce. Non-distressed companies adopted growth strategies such as purchasing land for
development, focusing their offerings towards high-end products, vertically integrating and diversification.
Practical implications – The increased understanding of the financial performance and operational
strategies will allow managers of property development companies to improve financial management and
adopt appropriate strategies in response to the impact of future financial distress.
Originality/value – The study presented in this paper is the first to analyse the financial performance of
Malaysian public-listed property development companies during the period of the 2008 GFC and to link their
financial performance to operational strategies.
Keywords Global financial crisis, Financial performance, Financial analysis, Property development,
Operating strategies
Paper type Research paper
The authors gratefully acknowledge the support of the National Real Estate Research Coordinator
Centre at the National Institute of Valuation Malaysian (INSPEN). The views expressed here are
those of the authors and do not necessarily represent the views of the INSPEN. They thank the editor
and three anonymous reviewers for their constructive comments, which helped them to improve the
manuscript.
 1. Introduction Global
The 2008 global financial crisis (GFC) has been described as the worst economic crisis since financial crisis
the Great Depression. By September 2008, the crisis with its epicentre in the USA rapidly
reverberated around the world with stock prices in many countries plunging dramatically.
In an analysis of inter-sector contagion risks, Pais and Stork (2011) found that one of the
conduits that contributed most to the global spread of the crisis was the downturn
experienced in the real estate markets. Studies of the cross-country impact of the financial
crisis on the real estate sector have been carried out by Newell et al. (2010) on capital flows, 175
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by Murphy (2011) on residential market, by Milunovich and Truck (2013) on investment

trust and REITs, and by Kwok and Forrest (2011) on institutional agents. Despite the fact
that the GFC originated from a subprime mortgage crisis and therefore intimately related to
real estate, Milunovich and Truck (2013) noted that only a small body of literature exists for
investigations into the effects of the GFC for property or real estate markets.
Inspired by these observations, the focus of this study was to examine the financial
performance of Malaysian public-listed property development companies prior to, during
and after the 2008 financial crisis. Previous research on the impact of the GFC, on which
both Adair et al. (2010) and Newell and Razali (2009) provided comprehensive reviews, was
mainly focused on property investment-making decision where trends in the economy and
property returns were analysed to demonstrate the impact of the financial crisis. The first
objective of this research was to assess the impact of the GFC from the perspective of the
property development companies by conducting an analysis of financial performance
versus prevailing market conditions. The property development companies that were
examined in this paper have also explicitly described their responses to the market
conditions commencing from the pre-GFC period where building material prices escalated
sharply and the more challenging GFC period where house buyers were delaying their
purchasing decisions leading to an oversupply situation. It follows that the second objective
was to examine the strategies adopted by these companies to mitigate the debilitating
effects of the GFC.
The paper is divided into five sections. The first section provides a brief introduction
to the study on the financial performance of property development companies and a review
of the relevant literature on financial analysis and corporate strategy. In the second section,
the impact of the GFC on the economy of Malaysia is discussed together with a summary of
the government’s policy response. The research method is described in the third section. The
fourth section reports on the analysis of financial performance together with a summary of
the strategies adopted by these companies during the GFC. The findings are discussed in the
subsequent section.
The use of financial ratios for research, although common in other industries, is rather
limited in the property sector. Financial ratios were first used in the late nineteenth century
for credit analysis and to evaluate business profitability (Horrigan, 1968). Fadel (1977)
conducted one of the earliest studies on financial ratio analysis for the construction industry
and ascertained that sales turnover had a great impact on the profitability of the UK
enterprises. Another detailed analysis of UK construction industry by Akintoye and
Skitmore (1991) showed that the profitability of eighty UK general contractors was
positively correlated with company size. The findings also indicate that profitability was
enhanced with diversification into speculative residential projects with a profit margin four
times larger than that of general contractors. Ellis et al. (2006) suggested that the financial
health of a company can be determined by five indicators: return on assets, return on equity,
fixed asset ratio, debt-to-equity ratio and working capital turnover, whereas Ong et al. (2011)
demonstrated that ratios for activity, cash flow, solvency, liquidity and profitability had
 JFMPC been found to be significant and useful for the prediction of corporate failures in Malaysia.
22,2 The absence of an explicit theoretical structure is a major shortcoming of ratio analysis with
considerable debate about which ratios to be used and what their proper levels should be.
Nevertheless, ratio analysis remains a simple and quick method that will enable a
comparison of financial statements between firms and over time.
In a strategic planning paper for real estate companies, Hewlett (1999) describes the real
176 estate market as a very cyclical business where any slowdown in growth in the overall
economy can create a recession in real estate, particularly if there is a rapid erosion of
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consumer confidence. Five different strategies suggested were: growth, rationalisation,

efficiency, organisation and capital formation. However, during certain periods in the real
estate or economic cycle such as a downturn, the rationalisation strategy of maintaining core
competencies and key personnel comes to the fore. Efficiency strategies are particularly
important too during down cycles. A number of these strategies were reportedly utilised by
construction companies in Singapore (Lim et al., 2010) during the prolonged recession due to
the Asian financial crisis of 1997. They found that these companies implemented efficiency
measures to control costs, and a rationalisation strategy of bidding for projects that were
within their firms’ resources and capabilities, freezing or cutting salaries, laying off staff and
setting aside contingency funds. Campello et al. (2010) reported that financially constrained
firms reduced expenditure on employment, technology and capital investments and
marketing, and reduced dividend payments. While some constrained firms had to resort to
the sale of assets to obtain cash, non-constrained firms show no significant propensity to sell
assets. In a survey on sub-contractors, Oviedo-Haito et al. (2014) found that competition was
intensified during the GFC despite worsening market conditions such as significant delays
in payments. In response, these sub-contractors adopted a strategy of reducing staff,
employing staff through fixed-term contracts and seeking projects overseas. de Waal and
Mollema (2010) described three defensive strategies – cost reduction, focus on core activities
and downsizing; and three offensive strategies – strengthen internal organisation, increase
turnover and margins and exploit opportunities, to survive and thrive in a crisis. The only
case study on a property developer was reported by Tansey et al. (2014) who confirmed the
adoption of the following defensive strategies: reduce costs and salaries, employ staff on a
project basis, renegotiate loan agreements and acquire overdraft facilities to improve cash
flow. In response to difficulties in the sourcing of loans for projects when banks reduced the
loan-to-value ratio from 80 per cent to 60 per cent, the developer sought to secure funding
and to share risk in a joint venture with a capital investment company. The developer chose
to focus its marketing strategy on the development of retirement villages during the GFC
resulting in an increase in the firm’s market share over the recession. Zuo et al. (2015)
recommended that large Australian construction companies should adopt a two-pronged
approach to minimise unnecessary capital spending and to make strategic investments for
marketing, training and the adoption of sustainability initiatives to improve long-term
competitiveness. They recommended avoiding “cut-throat” bidding as this behaviour of
reducing margins or profits was not healthy for the sustainable growth of the industry.

2. Impact of the GFC on the Malaysian economy and policy response

Asian economies, including Malaysia, were affected by the financial contagion, even though
their business cycles and that of industrialised countries have been observed to be
decoupled (Kose et al., 2012). Malaysia’s gross domestic product (GDP) contracted by 5.8 per
cent year-on-year in the first quarter of 2009, followed by another contraction of 3.7 per cent
the following quarter triggering the onset of a “technical recession”. In response, the
government implemented two stimulus packages – the first amounting to RM7bn in
 November 2008 and the second to the tune of RM60bn in March 2009 – to ameliorate the job Global
losses and destabilisation shocks faced by the people and to bring forward development financial crisis
expenditure to offset the fall in aggregate demand following significantly reduced exports.
These two stimulus packages, as a percentage of GDP, were the third largest after China and
Saudi Arabia (Doraisami, 2011).
Specifically on real estate, the first stimulus package made provisions for the
construction of low-cost housing and the opening up of the real estate market to foreign 177
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sales. The second stimulus package provided additional incentives of tax relief on interest
paid for housing loans (RM 30,000 over 3 years) and of RM200m for Syarikat Perumahan
Negara Berhad, a state-owned housing development company, to provide affordable
housing for the lower-income group. Incentives were provided for banks to defer
repayments for housing loans for one year and strengthened the Malaysia My Second Home
Programme. Coupled with external factors (e.g. the upturn in the global economy), these two
stimulus packages produced the desired effect. There were however certain real estate-
related measures within these stimulus packages which did not produce the desired effect:
notably, the measure to promote home ownership among civil servants in the form of longer
loan tenures (25 to 30 years), and for home ownership generally though partial stamp duty
exemptions on sales and loan agreement articles on the purchase of medium-cost houses of
up to RM 250,000 and the introduction of income tax reliefs for the purchase of medium-cost
houses (Valuation and Property Services Department, 2010). By the fourth quarter of 2009,
their trickle-down effects were felt (Zainal Abidin and Rasiah, 2009; Sieh Lee, 2011) with the
stock market index (KLCI) exceeding the previous peak by the end of 2010. Details of the
policy changes and market attributes from 2004 to 2012 can be found in Table I.

3. Research method
The research design was constructed around two main methods: a review of the financial
data and content analysis of the “statement to shareholders” in each company’s annual
report. This approach enabled the response strategies that emerge to be linked to the
company’s financial performance – a relationship that was not explicit in previous studies.
The majority of research in the area of corporate or recession strategies were based on either
questionnaire surveys of senior management executives or interviews conducted ex-post.
Allowing participants to reflect on the recession and their actions may introduce either a
positive bias towards actions that have been proven to be successful or a negative bias
against unsuccessful strategies. Evaluation of the ex ante response strategies from the
statement to shareholders, as the financial crisis unfolded, was intended to eliminate this
perceived bias.
The period of study from 2004 to 2012 was selected to encompass the years leading up to
and after the GFC. A total of 86 companies were listed under the property sector of the Kuala
Lumpur stock exchange, Bursa Malaysia, as of December 2013, at the commencement of this
research project. The following screening criteria were adopted to select a representative
sample of property development companies:
 the companies had to be listed from 2004 until 2012 to enable the pre-GFC, GFC and
post-GFC periods to be characterised;
 there were no significant changes to companies’ financial structure as a result of
mergers and acquisitions, changes to financial year that leads to discontinuities in
the reporting period or prolonged suspension of trading status due to sanctions or
irregularities;
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22,2

178

Table I.
JFMPC

study period
Government policy
changes and market
conditions during the
Attribute 2004 2005 2006 2007 2008 2009 2010 2011 2012

Policy Changes
RPGT 1/2/3/ 30/30/20/ 30/30/20/ 30/30/20/ 0/0/0/ 0/0/0/ 0/0/0/ 5/5/5/ 10/10/5/ 10/10/5/
4/5 † 15/5 15/5 15/5 0/0 from 1-Apr 0/0 0/0 5/5 5/5 5/5
Stamp Duty waived from 50% discount for Reduced stamp Reduced stamp
1/1/04 to 31/5/04 < RM250k duty < RM250k duty < RM350k
Tax Relief Yes. Loans < Yes Yes. Up to RM10k Yes. Up to RM10k
RM180k
FIC Rules ‡ Above RM250k
Other Policies EPF Acc-2 for EPF Acc-2 for
house purchase house purchase
Market Conditions
Economy Weak global First sign of Deteriorating Eurozone
outlook trouble local economy uncertainties
Oil and Fuel High oil prices High oil prices 30% increase in High fuel prices High fuel prices
fuel price
Market KL and Johor Johor oversupply Johor oversupply Johor oversupply Johor oversupply Johor oversupply Johor oversupply
oversupply of of residential of residential of residential of residential of residential of residential
residential
Mortgage Low interest rates Low interest Rising interest High interest LTV of 70% for
rates rates rates 3rd property
Building Price increases Price increases Steel price Price increases Price increases Price increases
materials increase
Manpower Shortage of Shortage of Shortage of
workers workers in Johor workers in Johor
Construction Output fell 1.9% Output fell 2.5%

Notes: † Real property gains tax for properties sold after 1/2/3/4/5 years; ‡ Foreign Investment Committee Rules governing the purchase of property by foreign
nationals
  primary activity to remain substantially as property development (i.e. the Global
proportion of revenue from property activities must be more than 50 per cent); and financial crisis
 primary area of operation to be in Malaysia (i.e. proportion of revenue from
Malaysia must be more than 50 per cent).

Seventy out of a total of 86 companies fulfilled all four criteria. To reduce the sample to a more
manageable size, these companies were then sorted by value of total assets for year 2012 in
179
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descending order and all odd numbered companies were selected to make up the sample.
Four of the main financial figures examined were total revenue, total profit before tax, net
profit and total equity. Previous work by Ellis et al. (2006), Yap et al. (2010) and Ong et al. (2011)
have determined sets of financial ratios that can discern the financial health of a company, but
none of these were specifically conducted for property development companies. Discriminant
ratios for the financial performance of companies in the banking (Said and Tumin, 2011),
insurance (Chen and Wong, 2004) and construction sectors (Fadel, 1977; Akintoye and Skitmore,
1991) are often different because of specific industry characteristics. A review of the guidelines
for these financial ratios can be found in Chen and Wong (2004) but recommended values should
always be set by industry norms or general rules of thumb (e.g. liquidity ratio > 1.0). No useful
recommended values for these financial ratios were available for property developers. To
investigate the discriminating power of financial ratios to characterise the performance of
property development companies during the global financial crisis, ten ratios in five categories
were computed and analysed. Weighted averages of these financial ratios were obtained by
multiplying each ratio with the relative market capitalisation of each company. In addition, the
fall in revenues from the pre-crisis peak to its lowest point was computed by following
methodology proposed by Reinhart and Rogoff (2014) for each company in the sample. Full
recovery was defined when the revenues returned to the previous peak. A severity index was
then calculated by adding together the depth of the downturn and time until recovery.

4. Results and findings

In 2007 and until the third quarter of 2008, the property sector was described as buoyant by
Mohamad (2010), based primarily on firm market confidence, the removal of real property gains
tax in April 2007 and the removal of foreign investment committee approval for residential
property above RM 250,000. Data from the National Property Information Centre (NAPIC, http://
napic.jpph.gov.my/portal), shown in Table II, indicate that the housing market in 2004 and 2005
was very active with a large number of units launched and sold, encouraged by high consumer
confidence and low interest rates. An oversupply of residential housing in the Kuala Lumpur and
Johor Bahru metropolitan areas combined with an increase in interest rates led to smaller number
of units launched in 2006. There was no discernable evidence of market distress in the residential
housing market in 2007 and 2008 with the house price index (HPI) increasing steadily and
launches on the rise. The only sign of a slowdown was a reduction of units launched in 2009 and a
small 1.5 per cent increase in the HPI. In the post-crisis period, the HPI exhibited large gains,
indicating the return of a strong demand for housing.
The summaries of the financial data and ratios for the sample companies are shown in
Table III. The sample of 35 companies reported aggregated revenues of RM6.28bn in 2004
that increased steadily to RM12.12bn by 2012. Total revenue fell marginally in 2006,
coinciding with an oversupply situation and two increases in the base lending rate initiated
by the central bank in November 2005 and February 2006. The property market rebounded
with a sharp increase in units launched and units sold in 2007, leading to an 11.8 per cent
increase in revenues for the sampled companies. By 2008, both units launched and sales fell
as the effects of the financial distress in the USA were felt in Malaysia. House buyers were
 Downloaded by Universiti Sains Malaysia, Professor Abdul Rashid B Abdul Aziz At 18:27 16 August 2017 (PT)

22,2

180
JFMPC

Table II.

house type and

number and sales

residential projects
performance of new
House price index by
Weight All houses 100.0 Terrace 72.7 High-rise 10.9 Detached 5.7 Semi-detached 10.9 Sales Performance
Units No. of Percentage
Year Index Change (%) Index Change (%) Index Change (%) Index Change (%) Index Change (%) launched units sold sold (%)

2003 107.7 – 107.7 – 111.3 – 106.8 – 106.1 –

2004 112.9 4.8 111.7 3.7 113.0 1.5 116.1 8.7 115.8 9.1 95,339 45,739 48
2005 115.6 2.4 114.0 2.1 114.1 1.0 120.9 4.1 119.9 3.5 57,290 26,478 46
2006 117.8 1.9 115.8 1.6 115.5 1.2 128.3 6.1 121.4 1.3 38,526 15,630 41
2007 124.0 5.3 121.1 4.6 118.8 2.9 137.5 7.2 130.3 7.3 52,664 23,749 45
2008 129.8 4.7 127.2 5.0 121.7 2.4 146.1 6.3 135.8 4.2 48,830 21,725 45
2009 131.8 1.5 129.7 2.0 123.4 1.4 142.8 2.3 138.6 2.1 45,909 22,055 48
2010 140.7 6.8 138.3 6.6 131.0 6.2 153.4 7.4 149.1 7.6 47,698 21,799 46
2011 154.6 9.9 153.0 10.6 145.5 11.1 161.4 5.2 162.5 9.0 49,290 22,797 46
2012 172.8 11.8 170.0 11.1 176.7 21.4 180.4 11.8 177.5 9.2 57,162 27,264 48

Source: NAPIC
 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012
Global
financial crisis
Total revenue (TR) 6.28 6.87 6.79 7.59 7.44 8.05 8.99 10.48 12.12
Profit before tax (PBT) 0.92 0.93 1.20 1.33 1.08 1.47 1.50 1.99 3.13
Net profit (NP) 0.61 0.56 0.87 1.00 0.77 1.08 1.01 1.39 2.44
Total non-current assets (TNCA) 13.02 12.75 12.87 13.97 14.45 15.05 16.12 18.74 26.32
Total current assets (TCA) 9.89 10.01 10.35 11.65 12.14 13.61 15.19 17.04 18.52
Total assets (TA) 22.91 22.76 23.23 25.61 26.59 28.66 31.31 35.79 44.85 181
Downloaded by Universiti Sains Malaysia, Professor Abdul Rashid B Abdul Aziz At 18:27 16 August 2017 (PT)

Total current liability (TCL) 5.74 5.52 5.16 5.72 5.97 6.69 7.15 7.70 10.68
Total non-current liabilities (TNCL) 3.79 3.60 4.13 4.46 4.64 4.62 5.55 7.07 10.12
Total liability (TL) 9.53 9.11 9.30 10.19 10.61 11.32 12.70 14.77 20.80
Net assets (NA) 13.38 13.65 13.93 15.43 15.98 17.35 18.61 21.02 24.04
Total equity (TE) 13.38 13.65 13.93 15.43 15.98 17.35 18.61 21.02 24.04
Market capitalisation (MC) 7.66 7.85 12.18 12.55 9.36 12.12 15.40 18.70 19.21
Profitability ratios
Net profit margin = (NP/TR) 0.08 0.05 0.16 0.17 0.12 0.17 0.07 0.13 0.20
Return on average assets = (NP/Average NA) 0.05 0.04 0.06 0.07 0.05 0.05 0.05 0.05 0.06
Return on average equity = (NP/Average TE) 0.08 0.06 0.09 0.11 0.08 0.09 0.08 0.09 0.11
Efficiency ratios
Sales to assets ratio = (TR/Average TA) 0.36 0.36 0.33 0.38 0.32 0.31 0.33 0.35 0.30
Sales to net working capital = (TR/Average 1.30 1.32 0.86 1.04 1.43 1.20 1.19 1.31
Net working capital)
Liquidity ratios
Table III.
Current ratio = (TCA/TCL) 2.55 2.64 3.07 3.31 3.10 2.91 2.85 3.27 2.05
Quick ratio = (TCA – Inventory/TCL) 2.37 2.48 2.89 3.16 2.91 2.71 2.62 3.08 1.84 Summary of financial
data and ratios for
Leverage ratios the sampled
Debt ratio = (TL/TA) 0.40 0.37 0.37 0.36 0.39 0.37 0.39 0.39 0.46 companies
Debt to equity = (TL/TE) 0.74 0.67 0.66 0.61 0.66 0.65 0.74 0.73 1.01 (2004-2012)
Market ratio (monetary values in
Earnings per share 0.14 0.12 0.13 0.14 0.12 0.14 0.21 0.17 0.30 RM billion)

reported to have delayed their purchase decision, leading to a fall in total revenue in 2008. In
view of the unsold stock from previous years, the number of units launched in 2009 declined
further to 45,909. Sales performance improved slightly to 48 per cent with a consequential
improvement in revenue for these property companies. This increase in revenue continued
right up to the end of the study period.
Aggregated total profit before tax, which was RM920m in 2004, rose to RM3.13bn in
2012, exhibiting more than a three-fold increase over a period of eight years. This growth
was interrupted by a decline in 2008, coinciding with the GFC but very quickly recovered
with a year-on-year increase of 36 per cent the following year. The effects of the financial
crisis were apparent with 11 out of the 35 companies reporting losses for 2008 compared to
only 7 in 2007. A corresponding decline was observed for net profits in 2008 with a modest
recovery in 2009. Other financial parameters, such as total assets and net assets, continued
to increase over the period of study as these were not affected by the poor sentiment
prevailing during the financial crisis. Market sentiment however caused the capitalisation of
these companies to fall from a pre-crisis peak of RM12.6bn in 2007 to RM9.4bn at the end of
2008, rebounding back to RM12.1bn at the end of 2009.
Five categories of financial ratios were examined: profitability, efficiency, liquidity,
leverage and market. Two methods of analysis were carried out – one at an aggregated level
 JFMPC and another where the companies were separated into two groups depending on their
22,2 performance before the onset of the financial crisis. In the first analysis, the financial ratios
were computed as a weighted average for the sample of 35 companies. The net profit
margin, defined as net profits divided by total revenue, was at its lowest in 2005 and 2010
and did not coincide with the period of financial distress. Net profit margins during the
period of the GFC were between 0.12 and 0.17, indicating that the profitability of the
182 property development operations was not dependent on the conditions prevalent during
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the GFC, such as reduced number of unit launches and poor sales performance. The overall
slowdown in unit launches and unit sales during the period of financial crisis led to
marginally weaker return on average assets values from 2008 onwards. These profitability
ratios took a period of time to recover, increasing to pre-crisis levels only in 2012. Both the
current ratio (defined as total current assets divided by total current liabilities) and quick
ratio (defined as total current assets less inventories divided by total current liabilities) of the
sample companies were on an increasing trend, indicating improving financial performance
over the period of study. The slight decline in 2008 was due to an increase in current
liabilities such as trade payable, amounts due to contract customers and short-term
borrowings. This can be attributed to a strategy of delaying payments to building
contractors and suppliers when units are not sold. The decline in both the current and quick
ratios in 2012 was due to the widespread use of leverage to finance development activities in
a rapidly expanding property market. The sample of property companies were rather
conservative with a debt ratio (defined as total liabilities divided by total assets) of 0.36
before the onset of the financial crisis and remained fairly constant until the 2012 when this
ratio increased to a value of 0.46, indicating a large increase in total liabilities.
To obtain greater clarity on the financial performance of these companies, the sample
was divided into two sets: a group of companies which exhibited signs of distress defined as
loss making in either 2004, 2005 or 2006; and another group that consists of healthy or non-
distressed companies. Fourteen companies were found to have reported a loss in at least one
of these three years. The remaining 21 were classified as non-distressed, as shown in
Table IV. The total revenue, profit margin and debt to equity ratio were calculated for three
periods – pre-GFC (2004 to 2006), GFC (2007-2009) and post-GFC (2010 to 2012) – and are
shown in Table V. The fluctuation in total revenue for these three periods was very apparent
with an annual change of 25 per cent during the pre-GFC period, falling to only 9 per cent
during the period of the GFC and increasing to 31 per cent during the recovery phase. The
distressed companies, however, exhibited a smaller annual change of 14 per cent during the
post-GFC period as compared to the non-distressed companies’ growth of 42 per cent.
Following on the classification of distress, these 14 companies exhibited an average profit
margin of 0.22 (i.e. loss) leading up to the GFC compared to a profit margin of 0.19 for the
non-distressed sample. It is perhaps surprising to observe a small profit margin of 0.02 during
the period of the GFC for the distressed companies and a loss of 0.07 in the post-GFC period.
For the non-distressed companies, there is clear evidence of a fall in profit margin from 0.19 pre-
GFC to 0.09 during the GFC improving to 0.20 post-GFC. There is a clear link between the debt-
to-equity ratio for the distressed and non-distressed companies in the period leading up to the
GFC, with distressed companies being highly leveraged with debt at 1.18 times equity, whereas
the non-distressed companies were only at 0.54 times equity.
Of these 35 companies, 29 suffered declines in revenue either in 2008, 2009 and 2010,
presumably from the effects of the GFC. The severity indices as calculated from the total
revenue of these companies are shown in Figure 1. The largest decline was seen in Malaysia
Pacific Corp (MPCORP), with an 83 per cent fall in revenue from RM85.8m in 2007 to only
RM14.9m in 2011 followed by another year of weak revenue in 2012. As expected, there
 Sample A Stock Sample B Stock
Global
Stock name Name of company code Stock name Name of company code financial crisis
AMPROP Amcorp Properties Bhd 1007 A&M A&M Realty Bhd 5959
BERTAM Bertam Alliance Bhd 9814 CRESNDO Cresendo Corp Bhd 6718
BJASSET Berjaya Assets Bhd 3239 EUPE Eupe Corp Bhd 6815
CVIEW Country View Bhd 5049 GMUTUAL Gromutual Bhd 9962
FARLIM Farlim Group (Malaysia) Bhd 6041 GOB Global Oriental Bhd 1147 183
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HOOVER Grand Hoover Bhd 7010 GUOCO Guocoland (Malaysia) Bhd 1503
KBUNAI Karambunai Corp Bhd 3115 HUNZPTY Hunza Properties Bhd 5018
LIENHOE Lien Hoe Corp Bhd 3573 IBRACO Ibraco Bhd 5084
MAGNA Magna Prima Bhd 7617 KELADI Keladi Maju Bhd ‡ 6769
MPCORP Malaysia Pacific Corp Bhd 6548 KEN Ken Holdings Bhd 7323
PTGTIN Petaling Tin Bhd 2208 MAHSING Mah Sing Group Bhd 8583
SBCCORP SBC Corp Bhd 5207 MKH MKH Bhd 6114
TEBRAU Tebrau Teguh Bhd † 1589 MKLAND MK Land Holdings Bhd 8893
Y&G Y&G Corporation Bhd 7003 NAIM Naim Holdings Bhd 5073
5959 PARAMON Paramount Corp Bhd 1724
6718 PLENITU Plenitude Bhd 5075
6815 SDRED Selangor Dredging Bhd 2224 Table IV.
9962 SPSETIA SP Setia Bhd Separation of the
1147 TAHPS Tahps Group Bhd 2305 companies into two
1503 TROP Tropicana Corp Bhd 5401
categories (sample
5018 YNHPROP YNH Property Bhd 3158
a 14-companies and
Notes: †Tebrau Teguh Bhd changed its name to Iskandar Waterfront City Bhd in July 2014; ‡ Keladi Maju sample B 21-
Bhd changed its name to JKG Land Bhd in July 2015 companies)

Sample A Sample B
Financial ratios Period (distressed) (non-distressed)

No. making profits | No. making losses 2004-2006 0 |14 21 | 0

2007-2009 7|7 17 | 4
2010-2012 7|7 21 | 0
Annual change in total revenue (TR) 2004-2006 25% 25%
2007-2009 16% 4%
2010-2012 14% 42% Table V.
Average net profit margin 2004-2006 0.22 0.19
Financial ratios
2007-2009 0.02 0.09
2010-2012 0.07 0.20 during pre-GFC, GFC
Average debt to equity ratio 2004-2006 1.18 0.54 and post-GFC
2007-2009 0.84 0.57 periods for the two
2010-2012 0.73 0.70 sub-samples

exists a large variance in performance within these 29 companies exhibiting severity indices
ranging from 14 (less severe) to 88 (most severe). The effects of the GFC were hardly
noticeable in an aggregated analysis of these companies with total revenues of RM6.28bn in
2004 increasing to RM12.12bn in 2012, representing a cumulative annual growth rate
(CAGR) of 8.6 per cent.
The three preceding analyses of the financial parameters, financial ratios and severity
suggest that aggregated data may hide the poor performance of a number of property
 JFMPC
22,2

184
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Figure 1.
Severity index for
property companies
in Malaysia

companies behind the generally stronger performance of the entire sample. It was also clear
that the highly capitalised companies such as SPSETIA, MAHSING and TROP were
performing very well with total revenue CAGR over the study period of 12.2 per cent, 22.3
per cent and 15.5 per cent, respectively.
A number of reasons can be given for the above observation. First, the eight companies
that exhibited continuous growth were the larger companies representing 36 per cent of the
total 2007 revenues, whereas the companies exhibiting larger severity indices were the ones
with smaller revenues. Second, the trough or lowest revenue for these companies was almost
evenly spread over 2008 and 2009, moderating the effects of the crisis. In fact, a number of
companies that exhibited decline in revenue in 2008 recovered to achieve revenues in excess
of their pre-crisis levels in the following year, reflecting the short-term effects of the GFC.

4.1 Operating strategies

Factors such as finance, land banking, product and diversification/integration were identified
as central pillars of the property development companies’ operating strategies. Strategies
adopted by both distressed and non-distressed companies are shown in Figures 2 and 3,
respectively, to highlight the differences in these two sub-samples.
Two options are available to the managers when funds are required for the purchase of
land for development. The first option is to raise additional equity from shareholders via a
share issue or an irredeemable convertible unsecured loan stock issue. This is preferred if
 Global
financial crisis

185
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Figure 2.
Strategies for
distressed
sub-sample

Figure 3.
Strategies for
non-distressed
sub-sample

the managers prefer to maintain a low gearing in the company (HUNZPTY 2010 and
MAHSING 2004 & 2007). The second option is to take out loans from commercial banks or
borrow from the money markets via the issuance of bonds, commercial paper (CP) or
medium-term notes (MTN). HUNZPTY raised two tranches of RM40m and another RM45m
from Malaysia’s first and second collaterised loan obligations.
Very often, the land for development will be purchased with bank loans in the first
instance and later refinanced with a CP or MTN at a lower interest rate (e.g. issuance of CP
and MTN by Global Oriental Bhd (GOB in 2005 at a lower interest rate to refinance bank
borrowings). The financial objective here is to limit gearing to a manageable level.
Distressed companies were highly leveraged in the years leading up to the financial crisis
with an average debt to equity ratio of 1.18. The servicing of these debt led to poor financial
performance of LIENHOE, KBUNAI and PTGTIN, resulting in drastic measures to raise
 JFMPC cash by selling non-core assets (e.g. GUOCO, 2004, 2006; PARAMON 2006) and to retain
22,2 cash by not paying out dividends (GOB, FARLIM, HOOVER, KBUNAI, LIENHOE,
PTGTIN and Y&G). In the distressed sub-sample, 12 out of 14 companies were reported to
have sold land or other assets to repay loans and consequently reduce their annual interest
payments. In contrast, only four companies in the sub-sample of non-distressed companies
were reported to have sold assets. The preferred method of raising money for their
186 operations was through the issuance of CP/MTN or bonds (seven companies) or through a
capital enlargement exercise (four companies).
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The most common mode of acquisition of suitable land for development is to purchase
land outright, but alternatives such as a joint venture or joint development agreement with
the landowner or a government agency may conserve precious capital. The ability to
identify prime location for these land parcels is a key factor for these companies’ overall
performance. Often, the success of the development projects depends largely on the
development being located adjacent to highways, commercial centres or preferred lifestyle
locations such as parklands, riverine or lakeside environments.
Property developers often offer a wide range of products from low-cost, medium-cost,
high-end and luxury houses and apartments. Larger developers build townships with mixed
residential and commercial offerings. Niche developers may focus on high-end or luxury
houses and apartments with an attractive concept offering either modern lifestyles,
innovative designs or green credentials. A common theme in all the reports was the
sustained demand at the two ends of the price range – a high demand for low-cost housing
and an elevated and sustained demand for high-end well-appointed and luxury houses or
apartments in prime locations. A number of developers reported that these high-end units
provided a greater profit margin compared to medium- or lower-cost units. Developments
that were particularly in strong demand were those that were gated-and-guarded, exclusive
enclaves with premium design and finishes.
The motivation for diversification is often to obtain a return from investments in an
industry that was not correlated to the property market. This includes investment into oil
palm plantation, the setting up of educational institutions or manufacturing. Other
developers chose vertical integration as a strategy to gain control over suppliers or
distributors to increase the firm’s power in the supply chain, reduce transaction costs and
secure supply channels. Examples of both backward and forward integration were
observed. Forward integration is where these companies decided to invest in or built their
own hotels and resorts or commercial buildings and to retain these assets to provide a
recurring income. A&M, EUPE, MKH, M K Land and Plenitude were examples of property
development companies with interests in hotels, resorts and golf courses. GUOCO invested
in commercial towers initially but later reallocated these assets to a REIT, though remaining
as property managers, earning a fee to manage these assets. Other property companies
integrated backwards with the establishment of in-house construction companies and
manufacturing of precast concrete components – this allowed profits from construction
activities and building materials to be retained within the group. The establishment of an
education institution within a property conglomerate is an interesting observation.
Paramount Corporation Bhd (PARAMON) built an educational institution to anchor their
development in Kota Damansara, providing immediate demand for student accommodation
in the residential developments.

5. Discussion
The issues that these companies face in an economic crisis are often critical to their survival,
but are these much different from those that can be found in any stage of the economic
 cycle? The eight themes under which 31 recession strategies classified by Tansey et al. Global
(2014) were not significantly different from the seven strategic fields identified by Cheah and financial crisis
Garvin (2004) in their framework for corporate strategy in construction. In fact, the
tendering/contract and procurement strategies by Tansey et al. could easily be classified
under business strategy in Cheah and Garvin’s typology. Although the findings of this
paper are focused specifically on the GFC, there is no reason why the entire set of strategies
should not be considered in any economic condition.
Recession strategies such as strict financial management across the business, up-skilling 187
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and retraining of staff, forming joint ventures and seeking out strategic alliances with other
companies, identified by Tansey et al. (2014), could be viewed as generic corporate strategies
relevant to all economic conditions. The strategies specific to the GFC where companies
lower their tender prices to secure work is relevant only to construction companies and not
to property development companies. Other cost reduction strategies such as reduced wages,
cutting bonuses, downsizing, renegotiating payment terms and selling non-core assets seem
to suggest sub-optimal business practices reaching a critical point during the period of
financial crisis. The only study that suggests that recession strategies are not very
dissimilar to generic strategies is Oviedo-Haito et al. (2014).
In the years immediately preceding the financial crisis, the base lending rate escalated
from 6.0 per cent in early 2006 to 6.7 per cent in mid-2006 and remained at this level until the
end of 2008. Companies that were highly geared rushed to reduce gearing by the disposal of
assets. These include the sale of assets such as land held for development, stakes in
subsidiaries and other assets to quickly raise sufficient cash to pare down their debt and to
improve cash flow. AMPROP, HOOVER and LIENHOE disposed of a number of building
assets to reduce bank borrowings in 2006 and 2007. MPCorp failed to complete the sale of
Wisma MPL despite putting it on the market for a number of years prior to the GFC. Other
companies such as AMPROP, BERTAM, CVIEW, KBUNAI, LIENHOE, PTGTIN, MAGNA,
SBCCORP either divested parcels of land, interests in subsidiaries or both to raise cash. Only
four companies from the non-distressed sub-sample were reported to have to resort to the
sale of assets to reduce leverage. The fall in the debt-to-equity ratio for the distressed sample
from 1.18 to 0.84 reflects the extremely high leverage in the years leading up to the financial
crisis and the consequential rush to dispose of assets to pare down debt. In comparison, the
non-distressed companies with a debt-to-equity ratio of only 0.54 managed to hold the ratio
at a near constant level until after the financial crisis.
A number of the distressed companies underwent business reorganisation. All 14 of the
distressed companies were either restructured or changed ownership in the years leading up
to the financial crisis. All the companies reported a review of their products during the
period of financial crisis, paying close attention to what the customers’ demands were, with
a large number of companies delaying their project launches until the market sentiment
improved in 2009. As the market leader in the East Malaysian state of Sarawak, NAIM
raised RM500m in 2008 and another RM445m in 2009 to finance projects during the
financial crisis but was forced to reduce the number of hours worked by employees together
with a wage-reduction exercise to manage cash flow. Another development company in
Sarawak, IBRACO, which was reported to be prudent with cash flow leading up to the
financial crisis laid off 94 employees when no new projects were launched in 2008 and 2009.
The performance and strategies of the distressed set of companies were not significantly
different from previous research on how firms respond to a contraction in aggregate credit
as exemplified by the 2008 crisis. Campello et al. (2010) reported that credit-constrained
companies implemented more severe measures compared to unconstrained companies.
Their study found that 70 per cent of the credit-constrained firms sold assets during the
 JFMPC crisis to raise funds. Similarly, de Waal and Mollema (2010) found that financially weaker
22,2 companies put more emphasis on cost reductions, downsizing and refocusing on core
operations.
During the recovery period after the financial crisis, many property development
companies that were previously offering low- and medium-cost housing units transitioned
into the development of high-end residential market with premium products in highly
188 sought-after locations in the Klang Valley and the Iskandar region in the state of Johor. The
rapid increase in price of properties immediately after the financial crisis led to higher profit
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margins for many developers in prime residential areas in Kuala Lumpur and the state of
Selangor. The companies’ balance sheets improved considerably because of the higher
valuations for building assets and land held for development. This sharp increase in asset
values so soon after the GFC effectively marked the end of the financial crisis for the
property sub-sector.
The review of operating strategies clearly indicate that the distressed sample of
companies were inclined to adopt more defensive strategies such as sale of assets, reducing
leverage, minimising costs, reducing wages and downsizing, whereas the non-distressed
companies were observed to adopt offensive strategies such as entering into joint ventures,
purchasing land, offering high end products, vertically integrating their activities and
diversifying into other businesses. Each company needs to examine its position carefully to
identify the status of its financial situation and determine the most appropriate course of
action. The finding that distressed companies would have to adopt survival strategies to
withstand the poor macro-economic conditions, whereas the non-distressed companies can
grow profitability by exploiting opportunities is consistent with the conclusions of de Waal
and Mollema (2010).
The financial results also indicate a significant difference between the strategies adopted
by property development companies compared to companies in a closely related sector such
as construction. In the face of a shrinking market and fierce competition, construction
companies may opt to submit “cut-throat” bids to maintain core competencies and retain key
staff. Previous work on the profitability of construction companies by Fadel (1977) and
Akintoye and Skitmore (1991) have determined that revenues and profit margin were the
main indicators of performance. Conversely, the basic tenet of the property development
business model is to secure funding either in terms of equity investment or bank loans to
purchase land and to fund construction of residential houses. It is perhaps not surprising
that the leverage and liquidity ratios are the discriminant ratios for the performance of
property development companies. Non-distressed companies kept their debt-to-equity ratio
below 0.6, whereas distressed companies exhibited a ratio exceeding 1.0 during the pre-GFC
period. The higher leverage ratio for the distressed sample is particularly disconcerting as
this ratio has been confirmed to be one with the highest correlation to financial failures in
Malaysia (Ong et al., 2011). Although revenues and profit margin remains the important
indicators of the financial health of property companies, the principal factor is the leverage
used within these companies to fund the development activities. The solvency of these
companies would certainly be of concern had the effects of the financial crisis been
prolonged.

6. Conclusions
This paper examined the financial performance of 35 property development companies in
Malaysia during the 2004 to 2012 period to characterise the impact of the recent GFC on
these firms. An aggregated analysis of their financial performance indicate that overall
effects of the financial crisis was minimal, with a 2 per cent fall in total revenue and 23 per
 cent decline in net profit from 2007 to 2008. Profit margins remained healthy throughout the Global
study period, with a 0.12 to 0.17 net profit margin in 2006 to 2009. The only financial financial crisis
measure that suffered significantly was market capitalisation that fell in tandem with the
local stock market. The debt ratio was observed to remain within 0.36 and 0.40 during the
2004 to 2011 period. The sharp increase of the debt ratio to 0.46 in 2012 reflects the use of
debt to finance projects in a rapidly expanding market. The limited impact of the financial
crisis was further confirmed with an average severity index of only 2 for the sample of 35
189
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companies.
The disaggregation of this sample into two sub-samples of distressed and non-distressed
proved more enlightening. The distressed sub-sample performed significantly poor
compared to the non-distressed sub-sample, therefore leading to the finding that weak
performance in 2004-2006 led to similarly weak performance during the period of the GFC
and beyond. On the other hand, non-distressed companies that exhibited strong
performance in the pre-GFC were minimally affected during the GFC, but recovered strongly
during the post-GFC period with an average annual increase in total revenue of 31 per cent
and an average profit margin of 0.20. This finding that past performance is a good indicator
of future performance seems to suggest that the effective financial management strategies
lead to long-term success.
The investigation on the operating strategies of property development companies
indicates that a number of common strategies adopted, as listed below:
 to keep the leverage ratio low by raising equity to purchase development land;
 to reduce the amount of interest paid by refinancing bank loans with lower interest
bonds, commercial paper or MTNs;
 to engage in joint ventures with landowners or government agencies;
 to focus on high growth areas of the Klang Valley and the Iskandar region;
 to offer high-end or luxury residential units with an attractive concept;
 to vertically integrate the development of business; and
 to diversify into other non-related areas of business as a hedge against property
development risks.

The key characteristics of the strategies by these property development companies during
the period of financial distress include the disposal of non-core assets to raise sufficient cash
to pare down debts and to improve cash flow. This sale of assets was observed mainly in the
distressed sub-sample and less in the non-distressed sub-sample. A number of the distressed
companies were restructured, taken over or had a complete change of board members as a
result of their financial troubles. It can be concluded that distressed companies have adopted
survival strategies during the period of the GFC, whereas the non-distressed companies
grew profitability by exploiting opportunities.

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Corresponding author
Toong Khuan Chan can be contacted at: tchan@unimelb.edu.au

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